In today's post, my hunt for bargains has led me to analyze PHES (Philippine Estates Corporation).

​PHES, which is majority controlled by The Wellex Group, Inc., is engaged in the business of holding and developing real estate with projects located in several developed areas all over the country.

This post summarizes the valuations based on net current asset value, net-net working capital and owner earnings analysis which supports my conclusion of the stock being an undervalued security.

If you are looking forward to invest in PHES, and want to know the range of prices to buy and sell the stock based on value, then this post is right for you.​

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Net Current Asset Value

The latest quarterly financials (1Q17) recorded the following items in the balance sheet. Excluding all other non-current assets, total net assets equates to P952 million. Subtracting total liabilities, we get an estimated net current asset value of P549 million.

This value if divided by the outstanding shares, we get a NCAV per share value of P0.3800. At the time of this writing, PHES price closed at P0.3750. Clearly, PHES trades at a slight discount to its NCAV value.

Net-net Working Capital

Getting the net-net working capital equates to a value around P229 million or a per share value of P0.1589. I consider a price like this a safe buy and if the market offered an opportunity, I would not hesitate to grab a lot of shares

Discounted Owner Earnings Analysis Adding Equity

Owner earnings analysis reveal that the company burned cash at a rate of P5.2 million a year since 2014. At 0% growth (which I consider a conservative assumption), the value of the future cash projected at 20 years at a discount rate of 12%, discounted to present equates to negative P39 million.

Book value recorded for the first quarter of 2017 ​equates to P1,054 million. Less the future cash, the value of the company at present equates to P1,015 million or a per share value of P0.7023. At a 50% margin of safety, an estimated buy price of P0.3511 per share is calculated.

Discounted Owner Earnings Adding NCAV

An interesting idea came up to me. Instead of considering the book value, I used the net current asset value instead and added the discounted future cash. Intrinsic value calculated turned out to be P510 million or a per share value of P0.3528. At 33% margin of safety, buy price calculated was P0.2364 per share.

Discounted Owner Earnings Adding NNWCV

Using net-net working capital, we should expect a much lower value. At this rate, value calculated was estimated at P190 million or P0.1317 per share. This is a very conservative value especially if a 33% margin of safety will be applied.

But in this scenario, I don't think a safety margin should be applied at this point. NNWC per share is already a safe buy price in my opinion.

Interpretation Of Calculated Intrinsic Values

You can see that a price anywhere below P0.3500 per share pose an opportunity to buy and a target of at least P0.5000 based on owner earnings analysis backed by NCAV and NNWC calculations.

We can also see that the stock traded at prices we expect them to reach in the past. It may be possible for the stock to rally if good news presents itself and investors respond positively.

What I don't like about the stock is that PHES is a thinly traded security. You can make a lot of money if a good price presents itself or if it goes south, you'll be left with an illiquid stock and would have to wait for an indefinite amount of time for the market to effectively price the business. I would buy this stock if it meets at least a 50% margin of safety - the more the better.

If the stock and price meets value at P0.7000, it's definitely a no-brainer sell.​

Final Thoughts

I would love to buy this stock regardless of its historical bad earnings because of the market's inefficient pricing. What I learned from the greatest value investors in our time is that we wait for the best offer. If the market presents that offer especially at net-net working capital values, it's a no-brainer.

This concludes my PHES stock review. I would love to hear your thoughts so make sure you leave them in the comments section below.

Happy investing!​

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